Month: February 2017

This week’s top stories: Why China is beating the rest of the world on fintech adoption, Wall Street gets ready to fight regulations old and new, and the data battles between banks and fintech firms continue.

By just about every measure, China dominates consumer fintech, generating over 50% the world’s mobile payments and 75% of P2P loans. How did it get so big so fast? State-owned banks were so slow to innovate that they opened the door to new entrants. China’s middle-class exploded and had mobile phones before they had credit cards.

Screen scraping is an outdated, insecure way to access banking data. Luckily, it’s being replaced by oAuth, which allows apps to pull data without using your login credentials. Next, the industry hopes to establish a single, widely-adopted standard for APIs.

Trump has pledged to roll back the regulations aimed at preventing another financial crisis. While the news has focused on the broad regulations of Dodd-Frank, smaller agency rules are just as important: the OCC, CFTC, and Fed will be more influential in the short-term.

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Over the past few weeks, we covered the data battles taking place in fintech. As the CFPB deliberates on whether to defend data aggregation, we urge them to remember their mission to “empower consumers to take more control over their economic lives.” To grant data ownerships to banks, rather than consumers, would represent a stark failure of the CFPB to deliver on this mission.

We encourage anyone who cares about their data to write the CFPB at the email address below. As Plaid, Yodlee, and other tech innovators have argued, continuing to innovate in fintech relies on customer data ownership. Here is the letter we sent to regulators:

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We are excited to announce that we closed the last tranche of our $8MM seed round. Valar Ventures was the lead investor with participation from Valar Ventures Citi Ventures and France-based Newfund.Our team set an ambitious goal in 2016 and successful processed more than a billion dollars in trade orders and five billion in assets linked last year.

The new round of funding will allow us to accelerate our growth by adding new partners to our expanding ecosystem of developers, create and launch new products, and continue hiring best-in-class engineers. We will also continue to expand our API management program for top tier financial institutions, providing a turn-key solution for a secure, compliant and efficient distribution of their services.We look forward to working with our existing and new partners as we power the retail investing infrastructure.

The robo-advisor is a fast-growing trend, but active investors aren’t going anywhere. Here’s why the market for active trading is growing, not shrinking, alongside the market for automated investment advice.

As Bitcoin’s use cases become more “mainstream,” its price is becoming much less volatile. While there is no ETF for Bitcoin (yet,) futures contracts are now allowing more investors to hedge their positions or even short Bitcoin, which is helping to smooth out price fluctuations.

Ali Baba’s financial arm, the owner of AliPay, is raising $3 Billion in debt to fund its latest acquisitions, including the $880 million purchase of MoneyGram, which has a presence in the US. The fundraising comes ahead of their planned IPO, which is expected to value the company at $60 billion, even higher than PayPal.

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How has investing changed after the election? In our first Data Dive of 2017, we use transaction data to find out.

Since Trump’s win in the 2016 election, the S&P 500 has rallied 10% and hit multiple all-time highs. The market may be on an upswing, but how has investor behavior changed? To answer this question, we’re taking a look at our transaction data, comparing behavioral patterns from the month before the election with those exhibited in the weeks after the news.

Here are some of our findings:

Buy Low, Sell High?

Looks like some investors are locking in their gains after the Trump bump. Since the election, our average sell order size has shot up by 50% while the average buy order size dropped by 11%. It looks like investors have been hoarding cash since the election, maybe waiting for an opportunity to buy at a discount if the markets get shaky.

Lazy Mondays

Before the election, Monday mornings were red hot on the trading floor. Post-election, traders started waiting until the end of the trading day to hit confirm – maybe holding out until volatility settles around 2-3pm.

It appears traders continued taking their sweet time after Monday into the middle of the week. While Tuesday was the hottest day of trading before the election, Wednesday appears to have regained its title as “hump” day, claiming the highest average volumes in the weeks following the election.

Draining the Swamp

Whatever your political views, it’s fascinating to see how a new administration can affect people’s’ portfolios. For example, our data suggests that investors are “draining” tech stocks from their portfolios after the election. Despite a few high-profile endorsements, Trump’s win is widely considered a net loss for the tech industry, which relies on visas for highly skilled immigrants to power innovation. As a result, investing in tech companies means is riskier in 2017, and investor appetite for the sector has cooled off.

A Golden Opportunity

Gold’s price tumbled 12% in the last weeks of 2016, but it looks like retail investors are staying put and holding onto the precious metal. While inflows remained relatively steady, our Gold-related outflows plummeted after the election. Given Trump’s unpredictability, this makes sense; Gold is seen as a safe-haven investment, and its value often increases during times of uncertainty.

Got a hypothesis for us? Interested in additional info? Email us or Tweet your data requests @TradingTicket for our next installment of the Data Dive series!

About the Author

James Barrios is a Management Science & Engineering Masters Candidate at Stanford University. James will be investigating patterns, trends, and other useful data extractions over the coming months. For this piece, James compared “Buy” and “Sell” orders placed before and after the November election.

The traditional banks are appointing “Chief Innovation Officers” to copy existing products produced by startups. But analysts worry that they’re doing it wrong, since the startup model of “iterate fast” and MVPs isn’t suited to financial corporations. This column suggests more effective ways for banks to innovate:

Seth Klarman is the Warren Buffett you’ve never heard of, and he’s worried about a Trump presidency on the markets. In particular, the longer-term effects of protectionism and inflation, which investors haven’t priced in while the S&P has rallied over the past 3 months.

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Across the pond, EU regulators are building a secure consumer-oriented financial ecosystem. To stay relevant as a global innovator, regulators in the United States act fast in doing the same.

Last January, European regulators passed the PSD2 law, which grants ownership of account data to the bank customer rather than the bank. Under PSD2, financial institutions will be required to provide free access to their customers’ accounts to any third party that the customer authorizes.

The Customer is Always Right

Consumers win under PSD2, because it encourages competition in the digital financial product space. Instead of being forced to use their banks’ clunky services, Europeans can sign up for any sleek new service, then authorize it to connect to their bank. This new and open market has tech companies building products that are better functioning, customizable, and more mobile-friendly than the existing products offered by banks.

PSD2 in GIF format, source: Medium

Smarter, Simpler Regulations

In the United States, regulators are still years behind their European counterparts. The challenge lies in crafting laws that remain relevant as the technology evolves over time. To avoid over-regulating the industry and creating never-ending work for themselves, US regulators should build a framework of principles and “best practices” for the industry. Without micromanaging the details, they must foster:

Ease of Connectivity: the adoption of a universal financial “language” that makes it easy for banks, customers, and fintech companies to share data using the same protocol

Consumer Protection: Acceptable use of customer information and disclosures

Acting Fast

It is time regulators take a stance in this debate with simple, forward-facing legislation. If Silicon Valley and New York are to remain competitive as fintech hubs, they need legislation that remains relevant as the fintech sector continues to evolve.

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Last week, Schwab cut its trading fee from $8.95 to $6.95, kicking off the 3rd Online Brokerage Price War – an occurrence that has happened every five or six years since the dot-com boom. Here’s what this “price war” means for the retail investor and the online brokerage community:

Short-Term Scramble

The next few weeks will see Schwab’s competitors scrambling to reset marketing campaigns, hold emergency meetings at the executive level and rethink their 2017 operating models.

Two of Schwab’s largest rivals, E*TRADE and TD Ameritrade, are in the midst of acquiring super-discount brokers OptionsHouse and Scottrade, respectively. These brokers charge $5-7 per trade, but their acquirers have stuck to $9.99 trades since 2010. If E*TRADE and TD plan to start charging their newly acquired customers $9.99, then Schwab’s latest price cut might lure price-sensitive investors, at a time when their primary broker is distracted with integration activities.

In the short-term scramble, we will be watching to see how Fidelity responds, if TD and E*TRADE sync their prices with their new acquisitions and what it means for lower-cost firms such as Interactive Brokers, TradeKing and TradeStaion, who are already being challenged by upstarts like RobinHood and TastyWork.

Falling Fees, Shifting Valuations

Historically, when one large broker slashes fees, the rest follow suit fairly quickly. That’s why online brokerage stocks plummeted 10% last week: they’ll all be forced to drop fees to stay in the game. Consumers should watch for new deals as brokers get more aggressive on their acquisition bonuses.

Why now? A Historical Reference

The first price war occurred in 2005, after online brokerage valuations tumbled 90% since the dot-com burst in 2000. Brokerages wanted to build their customer bases and rely less on commission fees, so they slashed trading fees, and started focusing more on mutual fund fees and parallel banking services, which provide steadier revenue streams than trading.

In 2010, as the US economy emerged from the financial crisis, brokers began wooing customers to get back into the markets, and lower-fee offerings were a key component of their pitch.

If we use history as a reference, the 2017 price war looks similar to its 2005 predecessor. The asset-gathering strategy is coming back into fashion, but this time it has a robo-twist. Schwab launched its own robo-advisor in 2015, which charges no trading fees but holds Schwab ETFs and a hefty chunk of cash. TD and E*TRADE followed suit last year, with “Essential Portfolios” and “Adaptive Portfolio.” It seems only a matter of time until Fidelity joins the robo-advised party.

In the meantime, low trading fees are getting new clients in the door, boosting trade volumes, and giving brokers a cross-sell opportunity for their more profitable offerings. In short, brokers are slashing fees in 2017 because they can’t afford not to.

The Bottom Line

The 2017 price war is just getting started. While brokers are working to figure out new revenue streams, consumers should keep their eye out for more price cuts, and more robo-advisor offerings, in the next year.

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This week, more “fin” than “tech” news in the wealth management space. While FinTech startups continue fighting for open access to financial data, brokers continued fighting the new DoL regulation, and price wars continued with trading fees and fund expenses.

President Trump has threatened to do a “big number” on Dodd-Frank, which covers everything from banking regulation to credit cards to trading fees. Fintech startups are lobbying to keep Section 1033 in place, which gives them the right to access data from their customers’ bank accounts.

Brokers are balking at the DoL fiduciary ruling by saying that it involves too much red tape, hurts consumer choices, and is too complex. However, this columnist argues that their biggest threat is investors moving towards low-fee investments that avoid conflicts of interest. He argues that brokers should focus on openly promoting high-fee products, rather than entering into backdoor arrangements with fund companies and passing the fees to individual investors without their knowledge. In the long run, client trust is the most important asset.

Charles Schwab reduced its trading fee from $8.95 to $6.95 – undercutting many of its competitors. The brokerage also joined the fund price war by reducing fees of mutual funds and some of their corresponding ETFs. On Thursday, brokerage stock prices fell from 5-10% on the news.